How Is That Financial Industry Reform Process Working Out?

Back in 2008, the following agencies of the Federal government failed to see the oncoming disaster known as a Great Recession, a recession that grew out of risky, shady, possibly illegal, and stupid financial activities of banks and other financial institutions:

• SEC
• FDIC
• HUD
• FHA
• Fannie Mae
• Freddie Mac
• Treasury Department
• Federal Reserve Board
• Senate banking committees
• Senate financial industry committees
• House Of Representatives banking committees
• House Of Representatives financial industry committees

None of these government agencies foresaw or acted to avert or minimize the impact of the recession. We all know the economic stress and pain this oversight caused just about every American.

As a result, the political class belatedly jumped into action with the Dodd-Frank Financial Industry Reform legislation. Although the horses were out of the economic gate, the politicians rushed in late to build and create new gate. As always, a dollar short and a day late.

But they did act so I guess they should get some credit for that. Unfortunately, there was not much meat on the bone of the legislation, once it was passed. The legislation was very general and non-specific and left the hard work of financial industry reform to various organizations of the executive branch.  That is where the actual government reform regulations would be written.

However, as we reported earlier this week, 75% of those regulations that should have already been written already have not made their expected deadlines  Thus, financial reform is very much work in progress, or work far behind schedule.

That may explain why the biggest financial business crash since the Great Recession, which recently happened, collapsed almost immediately, seemingly minutes before anyone realized it was going to collapse. Very reminiscent of Lehman Brothers, Bear Sterns, and others back in 2008, healthy companies one day, extinct companies the next day.

As before, no one in the list of suspects in the list above seemed to know MF Global was going over the edge. Could it be the delayed implementation of Dodd-Frank left the country and the industry no better off than three years ago? Details of the collapse were summarized in an article in the November 18, 2011 issue of The Week magazine, "Were The Rules Too Lax For MF Global?":

• Jon Corzine, former U.S. Senator, former chairman of Goldman Sachs, and former Governor of New Jersey took over MF Global last year.
• According to Daniel Wagner of the Associated Press, Corzine "set out to create a mini-Goldman Sachs but ended up creating a mini-Lehman Brothers" when MF Global collapsed.
• Not only did the company collapse, but the FBI is investigating whether or not Corzine and MF Global illegally co-mingled the firm's money with the money of the clients whose investments they were managing, with a reported $600 million of client money now missing.
• Jay Hancock writing in the Baltimore Sun called the regulators "negligent and clueless," stating MF Global made the same type of risky, irrational decisions on investments that helped cause the Great Recession.
• Francesco Guerra, writing in the Wall Street Journal, called for the formation of a "lead regulator" to replace the "crazy quilt of watchdogs" for non-bank financial institutions." Since there were at least four government regulators who were supposed to be keeping a watchful on firms like MF Global, and just like the run up to the Great Recession, none of the four saw the collapse coming until it was too late and $600 million went missing.
• The article concludes that the political class has been so busy just worrying about he handful of very large banks that they have been negligent in covering other financial institutions. I guess that Dodd -Frank reform bill was not as comprehensive as we were led to believe.
• Adam Ahmed writing in the New York Times claims some effort and potential rules were actually proposed for smaller companies like MF Global but they were thwarted by an influential opponent to these rules, the one and only Jon Corzine. The Times article claims that Corzine "personally pressed regulators to halt their plans" for this type of oversight. Corzine's argument won out, the additional oversight never took place, and now clients are potentially out $600 million.

So let's review:

1. A former member of the political class still has enough pull to get his way on lax oversight, a way that crashed a company and possibly lost hundreds of millions of client dollars of investment.
2. The rest of the current political class is so worried about only a handful of large institutions that this type of behavior goes unseen and not paid attention to until it is too late.
3. At least four government agencies are so inept, even after the lessons of the Great Recession, that they failed again to foresee a major financial collapse before it happened and ordinary American investors get screwed.
4. Risky Wall Street behavior still goes on despite the lessons learned from the Great Recession.

Or were no lessons learned? According to Alexandra Alper, writing for Reuters, even if the the Dodd-Frank legislation was on schedule for implementation, as opposed to being 75% behind schedule, it would not have made any difference in preventing an MF Global collapse since the main parts of the law would not have applied and MF Global was too small for the Federal Reserve to care about. Little solace to those who lost money within the $600 million mystery.

You get tired of saying it, but this is just another example of why Step 39 from "Love My Country, Loathe My Government" is so important. Step 39 would impose term limits on every Federal government politician. This is just another example of how our sitting politicians are just so ineffective in everything they do and everything they touch. There is no follow through to make sure laws get implemented in the proper way, no one ever seems to be accountable in the Federal government bureaucracy or the political class.

Tragedies and collapses are not seen ahead of time. Situations fall through gigantic cracks. Disasters are repeated over and over, costing American taxpayers and investors dearly. Even when they do try to fix something, e.g. Dodd-Frank, the effort is not comprehensive, not strategic, not effective, and in this case, not even completed on time.

And worse of all, the political class continues to take care of itself and its own members, in this case allowing Corzine to override some basic safeguards that may have prevented another financial institution collapse. Personal enrichment of themselves vs. doing the right thing for America. Sound familiar? Seems we have been writing about this disturbing trait often lately.

Thus, the answer to the question posed by today's title, "how is that financial industry reform process working out" Answer: not very well, at the cost of upwards of $600 million.



Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available, at http://www.loathemygovernment.com .It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respectfreedom for both yourselves and others everyday.
Please visit the following sites for freedom:

http://www.loathemygovernment.com/
http://www.cato.org/
http://www.robertringer.com/
http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendment.com/

Final Proof Of Undeniable Corruption, Immorality, and Greed of The American Political Class

Most of us have long suspected that the American political class had devolved to a state where personal political careers and wealth have now taken precedence over the good of the country, relative to most of our politicians. Rather than truly addressing and resolving issues in the right way for the right reasons, seems many of our politicians would prefer to take the cowardly approach and do nothing or do the wrong thing for the country rather than endanger their re-election and personal enrichment efforts.

We have reported on these situations many times in the past in this blog:

- In our September 1, 2011 post we reported on a analysis by two university professors of the historic stock market returns of Washington politicians' personal portfolios. Seems that both Democrats and Republicans serving in Congress, but especially Democrats, have historically outperformed the stock market's overall returns with their own stock portfolios. The study analyzed results over decades across hundreds of different politicians so the sample size is more than ample to draw conclusions from.

Given that these same politicians have not outperformed in any other facet of their jobs, it becomes suspicious that they would do so well in this area of personal enrichment vs. the rest of America's investors, i.e. you and me and professional investors. At that time, we raised the distinct possibility of insider trading of Congressional politicians because of their outstanding stock market performances. Coincidence or corruption?

- In our October 4, 2011 post, we reviewed a few of Senator Majority Leader Harry Reid's documented investment strategies over the past few years. According to John Ransom, writing for Townhall.com on September 30, 2011, in 2008, one month before oil prices took a historical plunge, the good Senator sold between $15,000 and $50,000 worth of energy stock holdings he held in the Dow Jones Energy index.

Shortly thereafter, he purchased between $15,000 and $50,000 worth of health care holdings in the Dow Jones Health Care Index, at a time when he was considering rewriting the nation's health care laws. Coincidence or corruption?

- Also from our October 4, 2011 post, consider the shenanigans of Congresswoman Ginny Brown-Waite. According to an article that was written by John Frank for the June 30, 2009 St. Petersburg Times.ne day before the House of Representatives approved a massive bank bailout plan in October, 2008, the Congresswoman bought stock in Citigroup, one of the major banks that received a significant portion of the bank bailout funding.


About two weeks later, on the day Treasurer Henry Paulson announced he would invest $250 billion of taxpayer money in nine major banks, the Congresswoman bought stock in Bank of America, one of those nine banks. Coincidence or corruption?


- On November 11, 2011, Money News reported on accusations that at about dozen lawmakers and their senior aides bragged about how much money they had earned in the stock market based on insider trading-like information that they knew ahead of the general public because of their government positions.


The article included the following details:

• The insider trading dollar amounts ranged from a few thousand dollars to six figures.
• Much of the insider trading involved companies that were likely to be brought before Congress for investigations, an act that usually resulted in a negative impact on a company's stock price. By shorting a stock ahead of that information being public, Congressional figures could and did make out sized profits.
• The huge profits were being made by people that had no serious background or past history of success in picking winners and losers in the stock market.

Coincidence or corruption? I think most honest Americans would conclude that all of these incidents are examples of political class corruption, immorality, and greed.


Now, some in the political class would claim that this last piece of corruption information cannot be trusted because it was made by Jack Abramoff, a former lobbyists who was convicted of corruption himself and who has served time in jail.


I would usually agree with such a stand but not this time. First, if anyone should know about corruption, it should be Abramoff since he was the king of corrupt special interests years ago. Second, a recent story that appeared on the CBS show "60 Minutes" not only verifies that this type of behavior exists but went so much further in explaining how and who was deeply involved in the corruption. (You can see the entire,unabridged  "60 Minutes" story at
http://lonelyconservative.com/2011/11/nancy-pelosis-insider-trading/)


According to the "60 Minutes" report, almost everyone in the country is subject to insider trading laws and compliance. This includes ordinary Americans, anyone serving in the executive branch of the Federal government (e.g. the President, the Vice President, etc.), and Federal judges. The only people excluded from having to comply are...members of Congress, the same people who wrote and passed the laws on insider trading that exclude themselves from being prosecuted for such actions.

Just when you think you have heard every conceivable sin, shortcoming, and outright immorality from our politicians, you come across this travesty. They have cleared the decks for themselves to make grand sums of money in the stock market by using insider government trading information.

Examples from "60 Minutes" included the following:

• John Boehner, currently the Speaker of the House, made a serious investment in health care insurance stocks shortly before he led the legislative effort to defeat a key component in Obama's original health care reform bill, a component that would have depressed health care stock prices if not defeated. With the component's defeat, health care insurance stocks rose and made money for Mr. Boehner. Coincidence or corruption?
• Several years ago, then Speaker of the House Dennis Hasert, made some land acquisitions in Ohio. He then worked to adjust Federal highway projects so that a new Federally-financed highway would run close to his newly purchased land, significantly increasing the land's value when he sold it.
• Congressman Spencer Bachus also seemed to do pretty well with insider information. The "60 Minutes" story was apparently inspired by a recently published book, "Throw Them All Out," written by Hoover Institute fellow Peter Schweizer. According to Schweizer, Bachus and Nancy Pelosi got secret briefings from Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson, who basically told the legislators that it was "a matter of days before there is a meltdown in the global financial system.”  Bachus went out shortly thereafter and invested about $7,000 to short the stock market. When the stock market did start to collapse, he was able to cash in the investment for almost twice what he originally put out just a few days before. He also shorted General Electric four times after Paulsen told him GE bond sales were having problems. Coincidence or corruption?

Terrible, terrible, immoral behavior. Which brings us to our favorite member of the political class, Nancy Pelosi. According to the story, Nancy Pelosi, former Speaker of the House, and her husband had access to at least eight IPO offerings over the past few years. As most of you know, we ordinary Americans rarely get in on a ground floor, the most lucrative financial time, in any IPO offerings.

The most troubling and potentially corrupt IPO was for the Visa IPO back in 2008. Ms. Pelosi purchased 5,000 IPO shares on the first day of the Visa offering at $44 a share. She sold it within days when the price had reached $64 a share, a profit of about $100,000.

What makes this so very troubling is prior to the Visa IPO offering there was a legislative effort within the House of Representatives to impose credit card fee limits on companies such as Visa. Obviously, if such legislation passed, it would certainly put a damper on Visa's stock price, and would depress the earnings and gains of anyone who invested in the Visa IPO.

That legislation was mysteriously never able to see the light of day prior to the IPO date. The legislation eventually did become law but the driver and leader in the legislation was the Senate, not the House, and passage happened well after people like then- Speaker of the House Pelosi had made their substantial gains off of the IPO offering. Coincidence or corruption?

I really do not know what to say. No more proof is necessary to finally declare that we have allowed a privileged, spoiled, selfish, and, because of the insider trading disaster, an immoral set of people to take control of the country for their own benefit and personal enrichment. Immoral, I cannot come up with any better word to describe this insider trading insult to the American taxpayer and citizen.

And the sad thing is that they do not see anything wrong with this immoral behavior. When the "60 Minutes" reporter, Steve Croft, asked Ms. Pelosi about her IPO behavior at one of her press conferences, her answer was both incoherent and bordering on indignant that someone could even imply she ever had a conflict of interest.

In press releases from her office later that day, she attacked the writer of the book, "Throw Them All Out," as being a discredited conservative.  In other words, she attacked the person and not his information or his process. The "60 Minutes" report showed how the writer and eight of his aides had meticulously gone through official financial records to ensure the book's accusations were accurate. She also accused CBS and "60 Minutes" of a "right wing smear," failing to mention in her press releases that the story also illustrated the same type of immoral behavior of several Republicans.

Ms. Pelosi did not refute that she had participated in the Visa IPO or had made a ton of money in the process. She did not refute that she had participated in many other IPOs while in a powerful position in government, Speaker of the House. She did not refute the fact that she had received highly sensitive and highly valuable advance information from Bernanke and Paulsen. She did not refute the fact that Congress had exempted her and her comrades from the very laws that every other American had to abide by. She tried to turn it into a political issue and attack the person, the messenger.

Obviously, three actions have to take place to fix this immorality:

1. Short term, we need to force Congressional members to make themselves subject to the same insider trading laws as the rest of us.
2. We need to tighten up information sources within government so that pending government actions are kept as secret as possible, as compared to the situation today (as referenced at the end of the "60 Minutes story) so that no one, either inside the Beltway or outside, gets sensitve and valuable insider information.
3. And the most important action is to implement Step 39 from "Love My Country, Loathe My Government" which calls for the Constitutional establishment of term limits for all Federal politicians, "one and done." There is no other way to deal with this immorality, the current set of politicians in Washington do not deserve to serve any longer, given the rampant corruption we constantly see.

When Pelosi became Speaker of the House in 2007, she boldly declared that she and the Democrats were going to "drain the swamp" of corruption in Congress, Instead, it looks like she and her peers in Congress built a dam and the corruption is as deep as ever. "One and done," it cannot happen soon enough.

One additional note: According to a recent blurb in Roll Call, and published the November 18, 2011 issue of The Week Magazine, the 500 or so members of Congress had a collective net worth of more than $2 billion, a whopping 25% increase over their collective wealth in 2008. The 50 richest lawmakers account for 80% of the wealth and the median net worth is about $513,000.

How many ordinary Americans do you know who made a 25% return in their personal portfolios in the past two years? Why wouldn't the 50 richest lawmakers serve their country for no salary and no benefits since they obviously can afford to serve, without suffering financial distress, if they did not collect salary or benefits. Wouldn't that be the moral, courageous thing to do.



Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available, at http://www.loathemygovernment.com .It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respectfreedom for both yourselves and others everyday.


Please visit the following sites for freedom:


http://www.loathemygovernment.com/
http://www.cato.org/
http://www.robertringer.com/
http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendment.com/

1. 

Economically Speaking, America Understands Reality, Our Politicians Do Not

Except for possibly the most die hard Obama supporters, most Americans recognize the underlying economic misery that Obama and the entire political class has brought down on this country:

• Official unemployment rate stuck at around 9% and 14 million Americans.
• A total unemployment and underemployment rate that is much higher, placing the national labor participation rate at its lowest rate since 1983.
• National debt approaching a catastrophic $15 TRILLION.
• Consumer confidence near an all time low.
• Housing industry near an all time low.
• Millions of home foreclosures across the country.
• High gasoline prices and rising food prices.
• Trade deficits in the hundreds of billions of dollars a year.
• A huge and expensive government infrastructure (i.e. Treasury Department, Federal Reserve Board, SEC, FHA, FDIC, Fannie Mae, Freddie Mac, HUD, Senate banking and housing committees, House Of Representatives banking and housing committees, etc.) that completely failed to see and act to prevent the Great Recession.
• A massive economic stimulus program that was a massive failure.
• An atrocious health care reform law that will not reform our health care processes in a positive manner but which is contributing mightily to the lack of job growth throughout the country.

Hardly a good report card on the political class economic performance. Consider what some of the private sector financial experts are saying about our economic situation:

- Economist John Hussman foresees a significant downturn in the U.S. economy in the near future: "Our broadest models (both ensembles and probit models) continue to imply a probability of an oncoming recession near 100 percent,"

- International Monetary Fund Managing Director Christine Lagarde recently warned of the risk of a “lost decade” for the global economy unless nations act together to counter threats to growth: “In our increasingly interconnected world, no country or region can go it alone. There are dark clouds gathering in the global economy.”

- Sen. Charles Grassley stated in a recent interview that the United States faces a fiscal Armageddon because of the mammoth and growing national debt.

-  Harvard economic historian Niall Ferguson recently stated at a lecture at the Manhattan Institute's Wriston Lecture: "What has been characteristic of this administration is that it has never attempted to arrive at anything resembling a credible plan to restore the finances of this country to balance. The last time the Congressional Budget Office tried to project fiscal policy on the basis of current policy, what it showed was that the United States would never again this century run a balanced budget, that it would run a deficit every year until the projections peter out in the 2080s."


- According to  November 9, 2011 Reuters report, the credit rating agency Moody's recently announced: "Moody's currently has a negative outlook on the United States, which means it could be the second rating agency to strip the country from its triple-A rating after Standard & Poor's."

- USAToday reported on November 10, 2011-  "The housing market will need at least eight years to rid itself of the 2.1 million homes either in foreclosure or carrying seriously delinquent loans." In the same article, USAToday reported that average housing prices in October, 2011 were more than 4% less than in October, 2010, indicating further stress in the housing market.
 

- The United States must reduce taxes and cut government spending in spur an economic recovery, McDonald's chief executive Jim Skinner told Sky News in a television interview: "In order to create jobs in America, you're going to have to do something with the tax. You have to cut taxes . . . particularly in the business community. We pay some of the highest [corporate] taxes around the world. There needs to be some leveling."

- When asked about Federal spending, Skinner went on to tell Sky News: "It's not a good story, that's for sure. The government has to spend less."

- Former U.S. Senator Alan Simpson, one of the co-chairmen of Obama's deficit reduction commission recently stated on CNBC: "It's very simple. If you spend more than you earn, you lose your butt. The American people know the fiscal path that Washington is on is not sustainable. These deficits are like a cancer. They're going to destroy the country from within."

Mr. Simpson accurately describes what the title of this post is all about: most Americans know you cannot constantly spend more than you make, it erodes both your wealth, your credit rating, and your freedom. It seems that our politicians are the only ones that do not understand what America and the experts above do understand: economically, things are bad and getting worse.

How would ordinary Americans address the economic malaise? We get a good idea of what most of us would do from a recent opinion poll conducted across a cross section of Americans by Reason magazine (December, 2011 issue) and the Rupe organization:

• 57% of those polled believe that reducing government spending will "mostly help" the economy while only 20% or so say it will  "mostly hurt" the economy.
• More than 77% support any reform that puts a spending cap on the Federal government that prevents it from spending more than it collects.
• 69% (50% of the 69% "strongly favor") favor a Constitutional amendment requiring a balanced budget.
• This finding is line with a recent CNN/ORC poll which showed that between 60% and 75% support a balanced budget amendment, depending on how the question is asked.
• 57% in the Reason-Rupe poll said that the government should focus mainly on government spending cuts to reduce the deficit with 37% who want to focus only on cutting spending with no increase in taxes.
• Only 23% wanted an equal emphasis on tax increases and spending cuts to reduce deficits.
• On a pessimistic note, 69% of those polled expect their taxes to go up in the next five years compared to only 6% who expect their taxes to go down. With the expectation of paying more in taxes, which would cause decrease household disposable income, it is not a surprise that American consumers are not spending as much, further depressing economic growth.
• On a further depressing note, of those that expect to pay more in taxes in the future, 62% believe that Congress and the political class will spend those increased taxes on new government programs, not reduce the debt of the nation or deficit spending.
• Despite what politicians say and fear, Americans are willing to accept cuts to entitlement programs as long as they get back the money they paid into the programs: 61% of those polled would accept cutbacks to current or future Social Security benefits and 59% would accept cuts to Medicare benefits, with the understanding they would at least get back what had been contributed to both programs in their names.
• Reforms of Social Security had support in the poll across all major political groups, supported by 65% of Republicans, 59% of Democrats, and 61% of Independents.
• A majority across sub-groups in the poll favored policies that would allow Americans to opt out of Social security (54%) and Medicare (56%). Thus, regular Americans are flexible and reasonable when it comes to attacking the insolvency problems facing Social Security and Medicare, a flexibility and sense of reality not present in our political class.
• As far as satisfaction with how the political class is handling the situation, and other issues, 48% of those surveyed would consider voting for a third party candidate who is economically conservative and socially liberal. Not a surprising finding since other valid opinion polls have recently shown Congressional approval ratings to be in the 10%-15% range.
• And the most depressing finding of all - 73% of those polled doubt that the Federal government, and the politicians that operate it, have the ability to solve our economic problems. This doubt is up from 52% in 2010 and way up from 41%  of those surveyed in 2002.

Very depressing, not only do ordinary Americans have a better understanding of what needs to be done to fix the economy, we have less and less faith and confidence that those running the government know how to fix the problems or are willing to fix the problems. Or, as summarized in the Reason article that presented these findings, "most of those politicians are throwing up their hands (and hiding under their desks) when faced with the prospect of making hard decisions about entitlement reform." No guts, no courage, no leadership.

As with every other issue facing America today, the existing set of politicians make the idea of term limits more and more attractive and necessary, as identified in Step 39 of "Love My Country, Loathe My Government." The citizens of this country, as proven in the Reason poll, understand what needs to be done to fix the economy of this country and how to keep our government and nation solvent. Our so-called leaders do not.

Thus, a Constitutional amendment is a necessary option, we need to dump out our political class on a regular basis, breaking the monopoly of do-nothing politicians that are entrenched in Washington. The alternative, do nothing, is a sure road to financial collapse and destruction of our democracy, just ask anyone (but a politician).


Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available, at http://www.loathemygovernment.com .It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.


Please visit the following sites for freedom:

http://www.loathemygovernment.com/
http://www.cato.org/
http://www.robertringer.com/
http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendment.com/

Even The Government Thinks That Social Security Is A Bad Deal

Many times in this blog we have pointed out numerous studies which showed how bad of a financial and retirement deal Social security is, citing numerous sources:

1. In a December 30, 2010 Associated Press (AP) article, AP reported on a recently published Urban Institute Social Security analysis that showed, on average, the typical American pays more into the Social Security system during their lifetime than they receive back during their retirement years.
2. In 1998, the Heritage Foundation published a similar analysis. It showed an average married couple would have been rewarded with twice their Social Security payments if they had been allowed to keep the money that was contributed to the Social Security Administration in their name and been allowed to invest it tax free in a balanced bond stock mutual fund.
3. In a number of posts in this blog, I have shown how much better off I personally would have been if the government had allowed me to put all of the Social Security contributions that were made in my name over my lifetime into an IRA-type account decades ago

Reliable, non-partisan analyses that show how bad a deal Social Security is. However, these types of analyses are often largely ignored or ridiculed by the political class in favor of the myth that Social Security is a fantastic retirement vehicle that should be protected at all costs...and kept under their control.

By perpetuating this myth, the political class maintains control over a large part of our lives, our retirement standard of living. This control not only reduces our freedom and our standard of living but gives our politicians more power and a constant election issue to perpetuate their time in office.

However, it is not only non-government sources that debunk the Social Security myths. I recently came across a government analysis from the late 1990s that also proved how lousy a retirement program Social Security is. On November 12, 1999, the Federal Reserve Bank of San Francisco published an economic analysis of the system's financial rate of return. The highlights of their findings include:

• The average worker in the Social Security system attains a rate of return on their Social Security contributions that is less than 2% when adjusted for inflation.
• In 1999, an American could have gotten almost twice that rate of return by personally investing in Treasury bills that at that time were averaging about 3.5% on an inflation adjusted basis.
• Even with the low rate of return, the analysis concluded that this low rate of return should be viewed as "rosy" since the political class had not addressed the long term solvency issues facing the Social Security system and those issues would either result in higher Social Security taxes or lower Social Security pay outs in the future.
• The San Francisco Fed concluded in 1999 that failure to address the solvency issues would reduce the average rate of return on Social Security contributions to around 1%.
• Not mentioned in the study, but what is obvious, is that if the rate of return on Social Security is only between 1% and 2%, this pales in comparison to what an American could have gotten over a long term investment of their Social Security contributions in an average stock mutual fund.
• The study takes note that numerous ideas have been put forth but Congress, i.e. the political class, had not acted on any of them, and concluded with the warning that "continued delays in addressing Social Security's long-term financing problem will only lead to more painful adjustments in the future."

This analysis and these conclusions were not reached by a think tank or a blog writer, they were reached by the economists at the San Francisco Fed  TWELVE years ago. Thus, at least parts of the government knew what a lousy deal this program was, and is, long ago. And it correctly pointed out that the system would be put under increased financial strain if changes were not made when they did the analysis TWELVE years ago.

Sadly, they were correct and as a result of inaction, lack of leadership, and lack of courage from our politicians, the changes will be more painful. Recent news reports have stated that the Social Security system went cash negative this year. In other words, the system is now paying out more money than it collects in taxes, requiring the Treasury Department to incur more national debt to cover the current Social Security liabilities and negative cash flow.

Typical political class performance. Why address an issue in a coherent, strategic, and financially sound way ahead of time that might endanger a few votes? Better to protect their personal turf, protect a few votes, satisfy a few lobbyists, and enhance their re-election chances, regardless of the increased pain and increased cost it will cause down the road.

How typically shortsighted but totally consistent with their mode of operation:

• Decades after ignoring the oil shocks of the 1970s, the political class has still not come up with an effective energy strategy, a delay that has resulted in high energy costs, reliance on unreliable foreign sources of energy, and potential harm to the environment.
• Decades after implementing a weak and ineffective drug addiction strategy, the "war on drugs," we have allowed violent drug cartels to flourish and we have incarcerated millions of Americans at the cost of trillions of dollars with no discernible impact on drug usage or change in our approach since the Nixon era.
• Decades after identifying the threats from under educating our kids via an under performing public school system, the political class has still not come up with a coherent education strategy that would provide American kids with a world class education experience, despite spending trillions of dollars to get mediocre education results.

In all major facets and issues of our lives, the political class has failed us, making their personal gains and political careers higher priorities than service to America and its citizens. Fixing any of the the above problems should not be insurmountable, we just need leaders with a little focus.

For example, three steps from "Love My Country, Loathe my Government," would fix an ailing Social Security system in a fair, coherent manner:

• Step 10 - reduce the Social Security tax rate but uncap the maximum amount of income subject to the tax and include all forms of income in order to make the percentage taken out of a household's income consistent across all income levels.
• Step 11 - prohibit citizens with a net value of over $3 million (e.g. Bill Gates, Donald Trump, Warren Buffet) from drawing a Social Security retirement check in order preserve limited resources for the most needy.
• Step 12 - raise the retirement age to 70 years, with a hardship exception, in order to reflect the changed demographics in the country since the Social Security program was introduced.

There, that was not hard. That should not be not hard, assuming that we had politicians in office with a little backbone and vision. The government and the political class came up with this horrid retirement plan, we are unfortunately stuck with it. The least they can do is fix it, twelve years after the same government identified its pathetic returns and needed changes.

The actual conclusions from the San Francisco Federal Reserve's analysis are listed below:

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Social Security has evolved from humble beginnings in 1935 as a program of "forced saving" intended to ensure retirement income for the elderly into its present form: a complex, resource-intensive program that redistributes income across individuals and households based on a wide variety of characteristics. In general, Social Security favors low-wage earners over high-wage earners, older workers over younger workers, women over men, and immigrant workers over U.S.-born workers.

The "average" U.S. worker faces a rate of return on contributions that is quite low--less than 2% after adjusting for inflation. By comparison, the real yield on a 10-year inflation-indexed Treasury Bond is currently around 3.5%. In addition to being low, rates of return from Social Security must be viewed as risky because they are subject to change from future political actions that will be needed to ensure long-term solvency of the program.

Under intermediate demographic and economic assumptions, Gokhale (1998) reports that the OASI payroll tax rate must be increased by about 4 percentage points (from 10.7 to 14.6%) to pay for projected benefits on an ongoing basis, i.e., for 75 years and beyond. Alternatively, long-term solvency could be achieved by cutting benefits by 25%. Either action would reduce the real rate of return for the average U.S. worker to around 1%. A tax increase would be disproportionately borne by young workers (who are further from retirement) whereas a cut in benefits would penalize young and old workers in a more even-handed way.

While numerous ideas for reforming Social Security exist, none have yet to be formally proposed in the U.S. Congress. Continued delays in addressing Social Security's long-term financing problem will only lead to more painful adjustments in the future.



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